Could Kohl's and Macy's Follow Nordstrom's Lead to Private Ownership?

The recent announcement of Nordstrom's (JWN) $6.25 billion all-cash deal to go private has sparked speculation about the future of other struggling department stores. Could Kohl's (KSS) and Macy's (M) be next in line to follow suit? Morningstar senior equity analyst David Swartz believes so, citing their poor valuations and the likelihood that investors will not give strong valuations to department store companies anytime soon.

Kohl's and Macy's, both facing pressure from activist investors, have seen their market capitalizations decline significantly. Kohl's current market cap of $16.02 billion is 44% below its 5-year average, while Macy's $4.67 billion is 67% lower. Their low stock prices, at $14.39 and $16.82 respectively, could make them affordable targets for private equity firms or strategic buyers.



Private equity or family ownership could bring strategic advantages to Kohl's and Macy's, such as improved operational efficiency, better long-term planning, and increased flexibility in decision-making. With private ownership, these retailers could focus on restructuring and reinvesting in their businesses without the pressure of quarterly earnings reports. This could lead to better product offerings, enhanced customer experiences, and ultimately, improved long-term growth prospects.

However, the current debt levels and cash flow situations of Kohl's and Macy's could pose challenges to their potential privatization. Kohl's has $2.31 billion in total cash and $682 million in free cash flow, while Macy's has $646 million in total cash and $279 million in free cash flow. Their debt levels, $16.02 billion for Kohl's and $19.37 billion for Macy's, might make privatization challenging without significant restructuring or additional financing.



Recent trends in same-store sales and revenue growth for these retailers have been mixed. For Kohl's, same-store sales grew 4% in Q3 2024 for the namesake brand, while Macy's reported a 0.035% decline in revenue growth for the same period. However, both companies have faced pressures from activist investors and declining market valuations, making them potential targets for private equity firms or strategic acquirers seeking to unlock value through operational improvements or asset sales.

In conclusion, the privatization of Kohl's and Macy's could be a viable option to improve their long-term growth prospects. However, the challenges posed by their debt levels and cash flow situations, as well as the mixed trends in same-store sales and revenue growth, must be addressed. Private equity or family ownership could bring strategic advantages, but it is essential to maintain a strong brand image and customer connection during and after a takeover. As the retail landscape continues to evolve, the future of these department stores will depend on their ability to adapt and innovate.